CFTC's Selig Tells States to Step Off: Prediction Markets Are Our Turf

Commodity Futures Trading Commission Chairman Mike Selig is making it abundantly clear: the CFTC has no intention of ceding ground on prediction markets. In case anyone was wondering whether the regulatory beef between federal and state watchdogs was cooling down, Selig just tossed another log on the fire—while casually daring the states to try their luck in court.

Speaking on the sidelines of the Digital Assets and Emerging Tech Policy Summit in Nashville, Selig told CoinDesk that the agency will continue to defend its "exclusive regulatory authority" to oversee prediction markets in court. "It doesn't matter if it's on sports, politics or anything else, if it's a validly offered product within a CFTC-regulated exchange, then we regulate that," Selig said. Translation: vibes-based gambling might fly in Vegas, but derivatives are still Washington's playground.

The CFTC has sued Arizona, Illinois and Connecticut, making it "very clear … that the CFTC has exclusive regulatory authority when it comes to commodity derivatives markets." A Third Circuit Court ruling on Monday that the CFTC must oversee prediction markets only bolstered the agency's position. Nothing says "we mean business" like a three-state lawsuit and a helpful appellate court nudge.

Under Selig, the CFTC has embarked on a major litigation effort to argue that prediction markets are providing derivatives products under the Commodity Exchange Act, rather than gambling services regulated by states. Think of it as the ultimate regulatory jurisdiction slap fight—except with lawyers instead of fists.

"Our view is that the statute is very clear that when you offer a swap on a federally regulated Designated Contract Market, that transaction, those trades, are subject to federal regulation," he said. "It doesn't matter if it's on sports, politics or anything else; if it's a validly offered product within a CFTC-regulated exchange, then we regulate that, and the states don't have the ability to nullify federal oversight and substitute gambling laws where derivatives laws apply." In other words: read the room, state AGs.

When asked why the CFTC didn't sue Nevada or Massachusetts — two states that have secured preliminary injunctions against prediction market providers — Selig said "I wouldn't say, just because these are the first states, that they'll be the last." The CFTC filed an amicus brief in a consolidated case before the Ninth Circuit Court of Appeals, which will be heard next week. The Ninth Circuit includes Nevada. For those keeping score at home: it's only a matter of time before Sin City gets the official love letter from the CFTC.

Under the Dodd-Frank Act, the CFTC can regulate swaps and can block certain types based on whether they are in the public interest. These categories include war, terrorism, assassination, gaming, anything otherwise illegal or "other similar activity." Yes, you read that right—war, terrorism, assassination, and gaming are in the same regulatory bucket. The Dodd-Frank authors really were ahead of their time.

Selig said the main issue is that, under the law, the CFTC decides whether a product is contrary to the public interest. The lawsuits are focused on that aspect — regardless of the events underlying the contracts. "Even if those categories of underlyings, whether it's war terrorism, assassination, gaming, and so on and so forth, even if we have to do a public interest analysis, or we choose to do a public interest analysis, that doesn't mean that that's not within our exclusive regulatory authority," he said. "And so that's what the cases are about, and that's what we're fighting for." Essentially: we don't care if you're betting on elections or apocalypses, we're still the sheriff in town.

The CFTC is currently going through the formal rulemaking process to clarify its oversight of prediction markets. "We're open to suggestions as to what that process should look like and how to evaluate it," he said. "We're certainly considering that provision of the Dodd-Frank Act." Translation: slide into our DMs with your best regulatory framework ideas, anonymous degens.

Outside of prediction markets, Selig said the CFTC would review any comments on the final interpretation it published with the Securities and Exchange Commission last month. The guidance was intended to be comprehensive, so both companies and agencies had examples. "To the extent you have a tokenized security, we're not butting heads on the CFTC claiming it's a commodity or the SEC claiming a different type of commodity as a security," he said. "We've got clear lines drawn in the statute." Finally, a rare moment of regulatory harmony—two agencies actually agreeing on something. Don't adjust your screen.